Hudson Global Inc (HSON) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Amy and I will be your conference facilitator.

At this time I would like to welcome everyone to the Hudson Highland Group fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS) I will now turn the conference over to Mr. Jon Chait, Chairman and Chief Executive Officer.

Sir, you may proceed.

Welcome to the HH Group conference call for the fourth quarter and fiscal year 2003.

I'm Jon Chait, Chairman and Chief Executive.

I'm joined by Richard Pehlke, Executive Vice President and Chief Financial Officer; and Brendan Flood, Senior Vice President.

I'd like to start off by reading the Safe Harbor statement.

Please be advised that our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include, among others, matters that we have described in our earnings release issued earlier today, and in our filings with the Securities and Exchange Commission.

We disclaimed any obligation to update those forward statements.

2003 was seen as a year of transition for HH Group (technical difficulty) of the fourth quarter were largely in line with (indiscernible) and with our expectation.

I would like to comment on our progress, some of the key areas which we have previously laid out for our shareholders.

We invested in the Hudson North American operations in 2003 to establish a foundation for future growth.

In Q4 we saw a continuation of this trend of steady growth in some of our practice groups, including accounting and finance, legal, health care and aerospace and defense.

The IT services group, which was restructured earlier in 2003, made more field sales orientation, experienced growth in contractors on billing in last four months of the year after 18 months of declining contractor numbers.

These are all important components of our future growth and our ability to meet our guidance.

We also achieved significant increased growth in firm activity at Hudson North American in Q4 compared to Q3, and this is the highest quarter of the year.

Hudson Australia is a major component of our business.

The theme of the year was to improve productivity.

We saw a continuation of the improving trend in the last three-quarters of '03, an increase in adjusted EBITDA profit in Q4.

In addition, in Q4 we took actions to further improve productivity, which were included in the fourth quarter charge which Rich will discuss after my remarks.

We believe that these changes will position us for continued profit growth in 2004.

In Hudson Europe the theme for 2003 -- a current difficult economy -- was expense control in our firm recruitment operations in order to reach a breakeven point, recognizing that we would have to wait for an economic recovery to generate significant earnings in that segment.

However, we plan to continue to grow our HCS business in order to generate additional earnings in the short-term and to diversify our exposure to the recruitment cycle in the longer-term.

In the fourth quarter we also accelerated performance reviews, which resulted in the reduction of additional personnel that were not meeting performance targets.

In Highland we continued the actions that were begun in Q3 in both Europe and North America, reduced our infrastructure costs and exit unprofitable operations.

In Europe we exited the Netherlands and Spain by selling operations to local management.

In Italy, Belgium, Germany and Switzerland we integrated Highland operations with Hudson, thereby achieving a reduction in our ongoing operational costs post repositioning costs.

We focused our Highland Europe executive search operations in the UK, which is Europe's largest market.

In Highland North America actions were taken to eliminate unproductive partners (indiscernible) personnel that exceeded requirements of the current business.

Next I would like to turn to a financial recap.

As has been the practice on each of our calls, I will limit most of my comments to the sequential movements within our business in order to give you some insight as to the trends in our business units.

Rich will review the financial results in more detail after my remarks.

And additionally, Rich will discuss the impact of the onetime charges that were taken in the fourth quarter.

Profit level to which I refer as adjusted EBITDA (indiscernible) our press release.

In the quarter gross margin was 103.6 million, an increase of 5.4 percent from Q3.

This was the second-best quarter of the year.

On a constant currency basis, gross margin was up one percent sequentially.

Including all one-time charges, SG&A was up slightly from the Q3 level, but was down by 1.1 million on a constant currency basis.

The operating result was an adjusted EBITDA loss of 10.7 million, and was slightly less on a constant currency basis at about 10.5 million.

In Hudson, Hudson incurred an operating loss in adjusted EBITDA for the fourth quarter of $0.5 million, although on a constant currency basis it was $800,000.

Gross margin was up 4.5 million and SG&A was up 2.6 million, although on a constant currency basis SG&A was down 1.5 million.

Temp margin percentage held at 16.6 percent compared to 16.5 percent at Q3.

In terms of temporary gross margin percentage, a decline in the UK was offset by increases in North America and Asia-Pac.

Overall, gross margin percentage was up slightly over Q3 levels, at 32.9 compared to 32.6 percent.

HRC increased 15 percent in the quarter or a 1.4 million as an increase.

On a constant currency basis the increase was 8.3 percent in HCS.

In North America Hudson, gross margin dollars increased $2 million or 14 percent in Q4.

Temporary gross margin percentage also increased to 20.8 percent from 20.2 percent in Q3.

Consolidated gross margin percentage in Q4 improved to 24.8 percent from 23 percent in Q3.

Permanent recruitment fees accounted for 19 percent of gross margin in Q4 and were up 42 percent over Q3.

The Hudson North American operating loss was 1.6 million compared to an operating loss in Q3 of 3.2 million before the receivables write-down of 3.4 million that was previously disclosed.

As I mentioned above, North American operations experienced steady growth in the number of contractors on billing in the IT, accounting and finance, legal, engineering, aerospace and defense, and health-care practice groups.

We also experienced improved firm recruitment trends in Q4, including the signing of several new relationships.

In the UK the result was nearly breakeven in a very difficult market which was substantially unchanged from Q3.

Overall, gross margin in pounds declined slightly in Q4, primarily due to a decline in perm fees.

Temporary gross margin percentage also declined slightly Q4, primarily due to mix changes.

SG&A was largely unchanged.

Accordingly, the decline in gross margins pounds flowed down to adjusted EBITDA.

The quarter ended on a strong note.

Results for the month of December were higher than in '02 local currency, which was a positive sign for '04.

We saw strong results for the month across both temp and perm in IT, finance, and HR practice groups, which are very important for our UK operation.

In Continental Europe, steady results were experienced in the Netherlands and Belgium, both of which reported small adjusted EBITDA profits in Q4, again in a very difficult environment, with a small loss in France.

We continue to see a shift from permanent recruitment to HCS in the Netherlands.

Germany continues to be a problem area, suffering an increased loss in adjusted EBITDA Q4 with a significant decline and gross margin in December.

Thus, the negative trend seems to be continuing.

We had a small profit in our Spanish operation compared to loss in Q3.

Overall, adjusted EBITDA loss for Q4 improved on Q3 1.3 million compared to 2.3 million.

In Asia-Pac and Australia, as I mentioned, we had a continued trend of improvement in results in Q4 and we have operated profitably in each of the last three quarters in 2003.

New Zealand continued to be profitable and we reported profits in both China and Singapore.

Turning to Highland, on a consolidated basis Highland had an operating loss of 1.9 million, entirely due to losses in Europe of 2 million.

In North America, which accounts for 70 percent of global Highland revenues, Highland achieved a small profit in the quarter, excluding charges.

Revenues in North America increased by almost 1 million or 8.1 percent in Q4 compared to Q3.

We took additional repositioning actions in the quarter in North America to reduce the expense base in line with current revenue levels and to (technical difficulty) unproductive partners and some real estate.

Europe accounted for the entire loss in Highland in Q3.

We have reduce the scale of our Continental European businesses and we're focusing our efforts on the UK, Europe's largest market.

Asia-Pac reported a small adjusted EBITDA profit in Q4, its first for the year.

We exited the year with a strong backlog in our North American operation.

Turning to Q4, as Rich will discuss in more detail we remain comfortable with our guidance of reaching profitability in the second quarter of 2004.

Looking at our current run rate loss in EBITDA, at the end of Q4 we expect our path to profitability to consist of the following elements -- first, continued improvement in Hudson North America, based on the results of the investments made in 2003 and a continuation of the steady improvement that we've seen in the fourth quarter and the end of 2003; continued improvement in profitability in Asia-Pac based on the continued improvement in productivity, resulting in part from actions that were taken in the fourth quarter; and three, having the operations in the remainder of the Company achieve modest profitability compared to operating losses sustained in Q4.

With that, I will turn it over to Rich Pehlke to talk about the financial results in more detail.

I'd like to just take a few moments to touch on a couple of items of our financials before we get to the Q&A.

Specifically I will address fourth quarter charges, as Jon indicated.

I will talk a little bit about our cash position and our outlook for cash going forward, the impact of currency in our numbers that we reported for the quarter and the year, a few comments about our expense base, and finally just to touch on a couple of key points relative to the guidance we've given the investors community.

So let's begin with the fourth quarter charges.

As you should be all aware, earlier -- a couple of weeks ago we preannounced that we expected to take some nonrecurring charges to finish off the repositioning that we had been talking about throughout 2003.

Jon has indicated some of those actions in his remarks.

The final amount came out to be $21.8 million, of which 12 million related to our Hudson operations, split between North America, 1.1 million; 5.6 million of that was in the UK and Europe; and 5.4 million of that was in Asia-Pacific region.

Highland Partners accounted for 9.6 million of the charges, predominantly in Europe was the number of 8.3 million, and US reported 1.3 million.

The charges were largely due to either severance and the removal of some people and closing down of offices and restructuring of offices throughout our operating territories and properties related costs.

The combination of those two items, along with 15.9 million of the charges.

The balance was spread over truing up an earlier recorded (indiscernible) reorganization charges related to the spin and earlier integration efforts, as well as depreciation and the loss on the sale of a couple of our subsidiaries that we had accomplished in the fourth quarter.

All these charges have largely been reclassified into the business reorganization expense line -- or the M&I line -- with the exception of loss on sale (ph) which will be down in other income and the small amount that is in depreciation related to some of our properties.

As you look at our income statement and the SG&A line, we've tried to make it as clean as possible to be the operating number.

We reconcile that back to our adjusted EBITDA on the last page of our press release which is filed as an 8-K.

Let me turn a moment to cash.

We finished the year with $26.1 million.

If we are pleased with anything in relation to our balance sheet it is that in 2003 our people have done an outstanding job in managing working capital, and in fact we have actually achieved positive cash flow on an operating basis.

We have absorbed $38.7 million of EBITDA losses over the last three quarters since we became a public company with a total cash burn of just $14 million.

And 50 percent of the cash burn related to cash expenses in the last two quarters alone of some of the restructuring efforts we have highlighted here.

So, our team has done an outstanding job of managing our resources, and getting the most and out of our balance sheet, and improving our operating procedures globally across the entire business.

As we have said in previous occasions, much of the cash that we have generated has been spent for repositioning and the severance efforts that we've taken to further strengthen our business and return to profitability.

We have had to spend more cash than we expected, and this has removed a slight amount of our cushion as we look forward into 2004.

But we still believe we have adequate liquidity and resources to accomplish our goals.

While our cushion is smaller, we still go enter the year with a strong cash balance.

We have always expected that the volatility of our daily cash position in a services business such as ours will be just that -- it will go up, it will go down; we have tax payments, commission payments, and payments that run in cycles throughout the operating months and weeks of our business.

We have adequate borrowing capacity in our Foothill credit facility.

We have not yet tapped that facility.

We don't see the need to do that in the near-term.

We currently have more than enough assets to support borrowing against $30 million of the facility today.

So that serves as a good backstop in the event that our volatility hits us in the short-term.

In addition, as we indicated in November, we've filed a shelf with the Securities and Exchange Commission and should we find the need to support our growth in a long-term fashion, we have the ability to go to the capital markets to put permanent capital in the business as well.

So we're very comfortable entering 2004 with our liquidity and cash (indiscernible).

Let me talk briefly about the currency impact.

Jon touched on some of these throughout the operations, but just so everyone is clear about the overall impact for the quarter, revenue was uplifted quarter-over-quarter by the currency movements by about 4.9 percent; same with gross margin at 4.8 percent.

Expenses also increased about the same amount, 4.7.

So we had a very almost insignificant effect on EBITDA for the quarter of a -0.2 in terms of currency impacts on the quarter for the Company overall.

Year-over-year, the currency impact was about 12 to 13 percent on each of the categories that I have just indicated.

So again, because of the fact that we have a good portion of our operations outside of the US, the currency movements which were pretty active, especially in the last half of the year, did impact our results, and at the net level slightly negative.

Because we're in a loss position, obviously the currency impacted our expenses.

We have taken significant steps to stabilize our expense base across our business.

When you look at quarter four against quarter three on a constant currency basis, we actually decreased our SG&A excluding depreciation by four percent.

So we feel comfortable we continue to move in the right direction.

Our people are doing an excellent job of managing the expense controls.

We never say we're satisfied, and I know I have a number of employees listening to the call so I want to make sure I reinforce that message.

But I also want to congratulate them because they are doing a great job in moving this in the right direction.

So when you take into account the currency impact, you will see a slight increase in the SG&A when you take out the depreciation.

But it was just a slight increase, again due to the currency movement.

We will continue to address the expenses.

We saw no major shifts in any of the categories quarter four against quarter three.

And in our SG&A line it continues to be about 70 percent of that number is people related expenses and the balance being the administrative and professional fees, etc.

Let me close my comments by just making a few comments about the guidance and reiterating what we said both in the press release and to reinforce Jon's statement about future.

We still expect that in quarter one we will have an EBITDA loss, and we think that loss could approach the level of the quarter four loss.

That's largely due to the fact that in our business January tends to be our weakest month as you come out at the year-end and it's usually a slow start month in terms of coming off the holiday season, as well as the holiday season from some of our operating geographies.

We do expect that we will get stronger as the quarter goes on and the current operating trends that we've seen as improvement will continue.

We expect quarter two be stronger with a positive EBITDA number for the Company overall.

In the context, if you think about our EBITDA loss of roughly $10 million in the current quarter, we see benefits from the actions taken in 2003 by the time of the second quarter of this year to eliminate about half of that loss.

And we believe the balance of that will come through the additional productivity and growth and improved operating conditions of our operation.

When we think about it in terms of three major geographies the size that we operate, for them to -- which are either operating at a profit now in the case of Asia-Pacific or close to profitability in the case of the US and UK and Europe - we do not think it is unrealistic to think that they can achieve another 1 to $2 million of EBITDA growth over the next six months by the time we hit the end of the second quarter.

We should see the benefit of any additional leverage and growth in the business come through as we continue to monitor our expense.

It is too early to call whether the balance of the year will be enough in terms of the operating EBITDA number to offset the first quarter when netted against the remaining three quarters.

That's why we say that we don't know yet the full-year results in terms of EBITDA from 2004.

With that, Jon, I think we will turn it over to questions.

Thank you very much, Rich.

Operator, I think we're ready for the question and answer session.

(OPERATOR INSTRUCTIONS) Matt Litfin, William Blair & Co. Matt disconnected from the conference.

Ty Govatos, CL King.

A couple of questions.

Could you give us an update on the effect of the new salesmen added in 2003 in the US?

And could you go through the SG&A again with and without currency?

I will take that, if you don't mind.

Let's go through the SG&A with that currency.

Without currency impact, in the constant currency basis we would have seen our fourth quarter SG&A without depreciation be 109.4 million versus the reported 114.2.

So that was about a $4.8 million impact in the fourth quarter.

That's ex the depreciation.

The depreciation and amortization is still running about 5 million a quarter?

Yes.

Okay.

And the salesmen?

We've actually seen a good ramp up in our operations from North America.

The percentage of revenue from the new hires for the fiscal year was about four to five percent in the operation and it has continued to ramp up.

As we look at it across the total gross hires were about 188 people in North America, about of which 100 of those related to the practice groups.

And we're seeing some very good movement and each month we track in monthly within the operation.

And we had pretty good results and steady improvements going through the balance of the year.

As we have said repeatedly, it took a little bit longer because of market conditions for our people to get ramped up.

We're very pleased at the quality of the people we're hiring and at the activity and the traction we are starting to get.

Okay.

Before I let you go, one very quickly.

Did you actually pay 6 million in taxes in 4Q?

No, we had to write off a tax asset that was on the balance sheet.

Shows you how good we are.

We can use (ph) a fair amount of money and still end up with a tax expense.

Thanks an awful lot.

That reflects a write-off of deferred tax assets in some of our places where we have either restructured out of the business or can no longer justify carrying the asset and it's a non-cash.

Thanks an awful lot.

Randy Mehl, Robert W. Baird.

I wanted to pursue a couple of items.

The first is I'm wondering if you could give January trends for Hudson revenue on a year-over-year basis in January for the various segments.

You mean of this January already?

Yes.

I don't think we know them yet.

I'm just wondering whether as we trended out on the fourth quarter, how the start to the year has been in the various geographies within Hudson.

The one thing I will say about that, it's too early to talk about it.

But we do monitor -- as Jon I have said repeatedly, we do look at these things on a regular basis.

We have nothing to indicate that we're off our plan relative to our looking at 2004.

We don't think January is our strongest month by any means, but we have nothing to show us that it has deteriorated away from our plan.

Related to that, should we expect a revenue decline I guess, first, in North America, in Q1 relative to Q4; and then across the system?

Given the various seasonalities, what should we expect in terms of revenue progression to Q4 to Q1?

I would expect that given the fact that we're expecting a loss near the level of Q4 that we would probably see operating results near or around the level of Q4 as Q4 as well.

We don't see anything (indiscernible) that will drive the results to vary to vary wildly from Q4.

Again, it's too early to call that because it really depends on how the operations do.

It sounds like a it is a big jump in profits from Q1 to Q2.

It sounds like half of that is related to actions already taken.

How secure is that?

And number two, what kind of revenue ramp does that imply?

Essentially, you need 5 million-ish EBITDA improvement.

Does that mean 10 million, 20 million in revenue?

I'm just wondering -- trying to get a sense of what you might need to get to that target.

It would probably be in the range of 10 to 20 million, as you indicated, in terms of probably true gross margin falling through.

Keep in mind, we're a business with a lot of moving parts.

That gross margin could come from firm, for example, where revenue and gross margin can be the same number.

It can also be -- it could come from the contract business where maybe the revenue would have to be higher in order to generate the same level of gross margin.

The mix will kind of determine how that falls out, so from a gross margin standpoint it has probably got to be in that 10 to $20 million range that you indicated.

In terms of the adjustments we've made on the expense base, these are real moves that we've taken.

A lot of what we've done, for example, almost half of our charges in the fourth quarter related to firming up the Highland partners business, which last year lost a lot of money.

That will be a big incremental swing year-over-year in terms of EBITDA because we do expect that business to be breakeven or better.

Just a final question.

You had a good gross margin performance, I thought, particularly in North America or in the Hudson America.

And I'm wondering, is that -- was there some unique items in that?

Or is that the kind of level we might expect going forward?

I think a couple things probably are starting to contribute to that.

Number one, remember we've come off a pretty tough year, especially at that the start of the year, so we should be seeing our gross margin improve as our new people are ramping up.

And we have controlled the expense investment somewhat near the end of the year and are starting to get production from what we've invested in.

So that should increase our gross margin.

As well as I think we did see some improvement, as Jon indicated, in our mix of business as well.

And going forward -- again without wild variations of trend -- it's going to be a slow and gradual continuation.

But we're not forecasting radical movements in the gross margin at this time.

The other thing I would say is that we're not assuming an economic recovery.

So we're simply looking at our numbers, and looking at the productivity of our people, and their trends in productivity, and in effect extending it forward.

Thank you very much.

I appreciate it.

Catherine Fellman (ph), Barrington Partners.

You may have answered this already.

I had problems with my connection to the call.

I was wondering if you could run through what portion of the restructuring charges will be paid out in cash in '04 and if you expect any additional cash restructuring charges going forward.

We indicated at the time we preannounced it, about 4 million of restructuring was paid out in the fourth quarter of '03, about 7 or 8 million would be in '04, and the balance would be in future years.

In two to three years?

It's probably spread over three to four years because that's the part that relates to later leases.

Most of the severance related activity and some of the lease activity gets paid out pretty quickly.

And that's where the 4 and then the 8 million comes out, that's the people related costs.

Do you anticipate any additional charges going forward?

We never say we -- well, never say never, but we don't anticipate it.

We would like to focus on running the business going forward.

We think we've taken quite a bit of action to put this business where it needs to be to address the market.

Thank you.

Kevin Sankey (ph), William Blair.

It is Matt Litfin.

A question on the charge from the fourth quarter.

Are you contemplating that the fourth quarter charge will result in -- I think you said 5 million or so annually of expense reduction.

Are you looking at that with no effect on revenue?

Or is that more of a net benefit when you look at both revenue and expenses?

It's really more -- that was speaking more to the improvement in the EBITDA of the run rate as we start to look forward.

Keep in mind that a lot of the action we took was to take people and cost out of the expense base without a material impact on revenue.

We had operations, as Jon I have indicated previously, especially in some of the remote locations -- for example, in Highland Partners -- where we did not have much of a chance to ever make those substantially profitable.

And we have removed them basically and that exposure from our expense base without really changing the game on the top line.

So you're basically saying that those people generated very little revenue, if any?

That's correct.

Another question I had has to do with employee turnover.

What are you seeing trend-wise there?

Are you at the point where you're able to measure some kind of a percentage level of employee turnover and can you share that with us in recent trends?

I don't have the exact numbers, but very broadly employee turnover -- and we always think about it as in two parts.

One part is employee turnover initiated by us and then employee turnover otherwise.

Employee turnover that is in the other category has fallen off fairly significantly in the last quarter.

Obviously, up until then there's issues with the ability to have comparable data and other things.

But employee turnover seems to have slowed down fairly significantly.

One more question, if I might.

It has to do with SG&A going forward.

I think you said last quarter that your vacancy rate at your active properties had been reduced to about 10 percent.

Can you give us an update there?

And I guess looking more broadly at SG&A, can you continue to take that down on an absolute dollar basis as you did here in Q4?

And if so, is 1 or $2 million per quarter something that's an doable for the next two or three quarters?

I think how I tend to look at it, and how I'm going to continue to drive it through the business as well as all our management, is to kind of take it down as a percentage of our revenue base and a percentage of our gross margin base.

I think that's the right way to look at it.

A lot of our low hanging fruit has been handled, and we're really down now to continually working on a day-to-day effort to make ourselves faster and more productive and slightly leaner in terms of our expense base.

Maybe moving $1 million here or there might be the answer, but I've got to tell you when it comes to real estate, for example, it's one lease at a time now.

We're down to that level where we are working major properties one at a time.

We've made a tremendous effort and good progress in getting rid of vacant space that we either had to sublet or move.

But we still have to address high-cost areas as of the leases come up or continually work the real estate market to see if we can make an effective shift.

The real key, I think, for us is we have to be able to leverage the growth of the operation on the current expense base.

What we've tried to do is make sure that as we put expense dollars into the business, whether it be for phone systems, a server, a person, or even office space, that we have the ability to handle the growth of the business without adding incremental costs because at the end of the day that's what's going to make the difference in our expense base.

Would it be a fair assessment to say -- or maybe a fair conjecture -- that the vacancy rate probably is still around 10 percent, and that maybe most of the progress in terms of the dollar amount of the SG&A has been made, and from here we're just looking at trying to keep it at around the same percentage of revenue as revenue grows?

Or a lower percentage of revenues as we grow.

Sorry.

That's obviously what I meant.

I think that is -- again, we're never going to let up the pressure on the effort.

But clearly we don't want to give you the impression that we're just going to stroke a pen and make X dollars go away from the current run rate.

That is hard to do at our current base of business because, again, as I have indicated, 70 percent is generally people-related, and so the important thing is to make sure you're getting the productivity out of those dollars.

Then on the administrative and office inside and things like marketing dollars, we will trim where necessary, but we're going to have areas where we're going to spend additional money.

We're going to have to pay for Sarbanes-Oxley in 2004.

We will have higher professional fees than we did in 2003.

That's an expense I can kind of control the magnitude of, but I can't control the fact that I have to do it.

That's very helpful, Rich.

Thank you, Jon.

David Cohen (ph), Midwood Capital (ph).

Just want to clarify sort of a trend.

You said that SG&A on a constant currency basis was 109.4 without D&A in the fourth quarter versus 114 reported.

What was the constant currency SG&A in Q3?

In constant currency it was 110.

With the changes -- with the productivity improvements you already think you have achieved, do you think that SG&A run rate is more like 104, 105 in the first quarter, assuming the largely fixed nature of that expense base?

I don't think that quick in the first quarter, no.

I think it is somewhere between -- it should there and where we're at now, I think, in the first quarter.

When will we likely start seeing a significant change in that line item?

Again, as I think I just indicated in my answer to Matt, the bigger thing to watch for is as we continue to grow the business, how it stays as a percentage of our total gross margin of revenue.

That's the key.

Seasonality will drive because of -- whether it's the employer related expenses, which are again the largest part of it, seasonality will drive some ups and downs based upon the business and how the business progresses.

They key is to make sure that that other 30 percent, which is a little more fixed, either stays where it's at or doesn't grow as fast as our business growth.

You're saying that the split -- what is sort of cost behavior within that basket of cost in terms of fixed versus variable?

For example, let's take a look at some of the bigger line item in our expense base.

If you take our SG&A, which is roughly -- excluding depreciation roughly $460 million last year, our annual occupancy is about $40 million.

That's not going to move (multiple speakers) significantly at this point in time.

Our equipment -- to have equipment or communication throughout our offices runs roughly about $18 million a year.

We're looking at all the ways we can reduce that in terms of our capital budget, etc.

But again, it's not going to move significantly.

I do think we can bring our bad debt expense down.

We've indicated that before.

Our bad debt expense was too high last year.

We've taken a number of steps to correct that.

I think our marketing and advertising in some cases will go down because we had to spend a lot of money this year to establish ourselves and rename ourselves, etc.

But we will focus those dollars in the most productive way possible through our revenue stream.

We have some built-in efficiencies in our marketing dollars.

Other than that, we're talking about things like professional fees, which just to give you the magnitude for our business, last year was $17 million.

That included all legal, audit, etc.

And it was the year of the spin.

We'll gain some efficiencies, I think, in the legal this year because I think we put some litigation that was hanging with us behind us.

But I will use some of that when I have to pay for Sarbanes-Oxley.

So then the balance, or most of the balance, I assume being headcount related --

That's exactly right.

How much is variable?

This sounds like these are largely -- there's some cost savings here that are based upon managers discretion and efforts to control costs.

How much of the costs in SG&A are going to vary directly with topline?

A large percentage of the employee cost varies with the topline.

Most of our people are in some form of incentive or commission structure throughout our business that really drives that cost line.

What would be a ballpark?

For every revenue dollar, what's the variable --?

I don't know that.

I honestly don't know that.

It's too general a statement given the mix of our business that I can't give you.

I would be guessing.

Again, to address -- just to give you a perspective of the changes we've made, there were significant pockets within our business overall that we addressed last year, where people costs were extremely high relative to either their revenue production or their profitability production that we had to correct.

You clearly made a ton of progress on that.

Could you go back -- I missed some of your commentary, what you were talking about your cash cushion.

And I know there is liquidity in your borrowing availability.

How do you think about the cash cushion today?

It's not as high as I would have liked it, because I thought I would have a few more million than I had to spend, but we're comfortable.

We're comfortable we can see our way through it.

Cash and working capital movement in our business is a day-to-day management issue.

We expect the volatility.

Our people know how to handle it.

We have a fair amount of control over it.

And we have the resources behind it to manage it.

One of the things you should appreciate is that because we had been more successful than we originally anticipated in terms of cash productivity, so to speak, we accelerated some of the actions that we took in the fourth quarter in terms of repositioning.

So there are things that we stepped up to do that we might not have done if we didn't have the cash availability.

So that is the degree of our confidence in terms of the cash outlook.

Dave Conning (ph), Robert W. Baird.

I have a couple of questions regarding the interest/other line.

I know there's been some variability in that line item in the past, including this quarter -- part of the charge.

I'm wondering how much of this quarter's loss was related to the charge; and then second, how we should model that line going forward?

Given the fact that our cash balance is slightly lower, it's not a material number in that line.

Most of the number that you see in that line from this quarter is the charge related to loss on operations.

So going forward we should expect that to be roughly breakeven, a little positive?

Yes.

It's not a big number.

Secondly on the D&A line, I think you mentioned 5 million normalized, which would imply a charge maybe of 700,000 or so this quarter.

And then going forward, should we expect that to start at around 5 million in Q1 and trickle-down a little bit through the year? (indiscernible) CapEx has been lower in recent years.

I'm sorry.

I just want to be clear.

Are you talking about depreciation?

Yes.

Okay, I'm sorry.

I think our plans are depreciation is for the next year is about 5 to $6 million as a rate.

Okay, 5 to 6 million per quarter?

Yes.

And to stay pretty constant throughout (multiple speakers)

In fact, our depreciation should trend down a touch because our new capital outlays are a lot lower than our historical capital.

And some of the capital and some of the assets that we have been depreciating on an accelerated basis were assets that we inherited and was in-process (ph) that we had stepped up to accelerate the depreciation of.

Thank you.

Matt Litfin, William Blair.

Jon, can you give us an update on the firm-wide branding initiative that you undertook last summer?

Are you seeing signs of more client recognition?

And do you have any specific examples that you can share with us on any successes there?

Sure.

I think just to put it in historic context, in the time period right around the spin we went through a process of rebranding the Company to the Hudson Highland name hierarchy, so Hudson in part of the business, Highland in the other and corporate is Hudson Highland.

In some of the operating units we used a transitional name of TMP/Hudson, and that is largely being -- I think is largely being dropped or has been dropped as of the first of the year.

It will be dropped through the course of this year.

So as Rich mentioned, we had a series of expenses related to simply signage changes, stationery changes, etc. etc.

We went through a process last year on establishing of brand, and we worked for the most part through the principal of the leadership in trying to position ourselves as a thought later, and therefore to get better name recognition among key decision-makers.

Tuesday of this week, for instance, we released the second release of something called the Hudson Employment Index, which is a monthly measure of employee attitudes about a variety of issues in the workplace.

And we got a considerable amount of attention to that with only our second release.

But I think you'll see that that was picked up on a couple of the major wire services, including Reuter's and CBS MarketWatch.

We have also issued a number of white papers on workplace topics, including corporate performance and diversity.

We plan to continue that through the year.

And we've held a series of events, client events, where we invite clients to hear presentations from our colleagues on topics like that and other topics.

So I think realistically coming from a brand name that was created April 1, 2003, I think we've gone through the year -- it's been the hardest year, I think, of the transition -- but we have it behind us, and I think we're gradually gaining more name recognition every day.

But we will continue to operate through a philosophy of PR and communications.

We do not plan any branding campaigns or broad-based marketing campaigns.

It's not our philosophy.

So I think we're making progress and I think we're very optimistic about the progress we can make in 2004.

Thanks, Jon.

At this time there are no further questions.

Leaders, do you have any closing remarks?

Operator, I will just reiterate that both Brendan and I are available to be reached at the New York office if anyone has any follow-up calls today.

And this call has been recorded.

It will be available after 12.30 Eastern time today by calling 1-800-642-1687 with a passcode of 5002963.

It will also remain available through Thursday, February 12.

For calls outside the United States it's 706-645-9291 with the passcode of 5002963.

You can also visit our website, www.hhgroup.com, to view the webcast.

With that, we would like to thank everyone for their participation and their attention and the interest in the Company.

This concludes today's Hudson Highland Group fourth quarter earnings conference call.

You may now disconnect.